Flash behaves poor on (some?) SL-installations, that's right, I experienced this myself. But don't blame a company (Adobe, apple) or a technology for this, even though there might be reasons to not like the one or the other.
First of all, most people here talk about video playback. Flash is not designed for video, so don't compare it to VLC or some other video-based thing. Flash is a technology turned into a product by Macromedia designed to provide rich vector graphics, animation and enhanced interactivity to the Web. After Adobe bought Macromedia in 2005, the technology itself was at it's peak. This was before the video-flood on the Web started. Then suddenly, everyone wanted video and for some reason, some people couldn't handle the different formats and therefore wanted a solution. What should the company do? Spending two years in a redesigned technology or bring out a solution which is sufficient but maybe not perfect? So there came some patches and addons to deliver better video experience but the base technology stayed the same. These addons were introduced by popular demand resulting in a more widespread use of flash. Of course it is possible to create a video-player using flash but no one claimed it to be a bright idea.
As an example: Imagine if Apple stopped the designing process in 2005 and decided to focus on just delivering what poeple currently needed by using the technology available back then and sending dot-version-upgrades. People would have cheered because they got immediately what they wanted. Now think of all the functionality which we have nowadays in the system and iPhone and everything. This would only be accessible by addon-installations given by third-parties or by experiencing drastical flaws in performance, reliability and (which obviously upsets people here the most) usability.
Think of a smooth round sphere which is the base technology, then apply some ugly bumps, a rough and hairy surface, dripping slobber, some dirt and you get what flash is USED for today, used by you and me and many flash-programmers. You can only correct this by redesigning a technology and smoothen out the surface again. That's why apple is focused on standardised (which means: highly developed and fully designed) technology: There actually IS the possibility that a standardised technology WILL just work. With non-standardised technology, you have no guarantee at all.
Yes, Adobe failed to advance flash, but they tried something new with AIR. Apple introduced Widgets and the iPhone SDK, Windows introduced Gadgets and Silverfast, Google released it's own stuff and SDK, Amazon goes Kindle, ... They all try to go new ways in delivering content. Some of the popular latest technologies in use are ajax, SVG and WebGL. Wait till they are fully developed and standardized or burned in hell and forgotten. Right now, they are all in their infancy, not even 5 years old.